No Tax on Overtime: What Counts for the 2025–2028 Deduction

What the deduction is, in one paragraph

Section 225 of the Internal Revenue Code, added by Public Law 119-21 (sec. 70202), allows a deduction for qualified overtime compensation. It is limited to $12,500 per return, or $25,000 on a joint return. It is reduced by $100 for each full $1,000 of modified adjusted gross income (MAGI) above $150,000, or $300,000 on a joint return. It applies to tax years 2025, 2026, 2027 and 2028, and the statute says no deduction is allowed for any tax year beginning after December 31, 2028.

You don’t need to itemize. The deduction is claimed on Schedule 1-A, Part III, and flows to Form 1040 line 13b, so it works alongside the standard deduction.

What counts: the FLSA premium, and only that

The statute defines qualified overtime compensation as overtime pay required under section 7 of the FLSA that is above your regular rate. In plain terms, when the FLSA requires time-and-a-half, the “time” is your regular pay for that hour and the “half” is the premium. Only the half counts.

The IRS spells out the formula for each workweek in FS-2026-13 (Q12):

FLSA hours over 40 in the workweek × ½ × your FLSA regular rate = qualified overtime for that week.

Three rules sit inside that formula:

• The workweek is fixed. It is a fixed, recurring 168-hour period, and each workweek stands alone. Hours are never averaged across two weeks, so a bi-weekly pay period with 30 hours one week and 50 the next has 10 FLSA overtime hours, not zero.
• The regular rate is not always your base rate. It is all pay for the week (with the FLSA’s listed exclusions) divided by hours worked. A nondiscretionary bonus or a shift differential raises it, and the premium with it. The regular rate guide shows the arithmetic.
• You must be covered by the FLSA and not exempt from its overtime rule. A salaried manager who is exempt gets $0, even if the employer pays extra for long weeks.

Here is one 46-hour week at a $20.00 regular rate, from the engine. Straight time for all 46 hours is $920.00. The FLSA premium on the 6 overtime hours is $60.00. Total pay is $980.00. The deduction counts the $60.00, not the $180.00 that a pay stub may label “overtime.”

A bonus changes the premium. Add a $46.00 nondiscretionary bonus to the same 46-hour week and the engine gives a regular rate of $21.00, straight time of $966.00 and an FLSA premium of $63.00. The higher premium is qualified overtime too, which is why Notice 2025-69 lets 2025 filers adjust a shortcut method when a bonus raised their regular rate.

What does not count

FS-2026-13 (Q16) says that when an employer pays more than the FLSA requires, “only the amount minimally necessary to satisfy 29 USC § 207 is qualified overtime compensation for purposes of the tax deduction.” That rules out:

• The extra half of double time. The IRS example: $20 an hour, 10 overtime hours paid at double time, $400 paid, $100 qualified. The double time guide covers when double time is required at all.
• Overtime that exists only because of state law, a union contract or company policy, such as pay for hours over 8 in a day or over 35 in a week, when the week does not go over 40.
• Weekend and holiday premiums, unless the week goes over 40 hours, and then only the FLSA premium on the hours over 40.
• Qualified tips. The statute excludes them; they have their own deduction.
• Overtime paid to anyone the FLSA does not cover or who is exempt, whatever state law says. That generally includes an employee who owns a bona fide stake of at least 20% and actively manages the business; FS-2026-13 (Q5) treats that person as an exempt executive.

Daily overtime and the 40-hour line

Five jurisdictions in our data have daily overtime: Alaska, California, Colorado, Nevada and Oregon, each with its own threshold and conditions. The state overtime table lists them with their sources. Daily overtime counts for the deduction only to the extent the same week also goes over 40 hours, because the FLSA has no daily overtime rule.

The engine run below uses $20.00 an hour under a daily rule that starts after 8 hours, compared with the FLSA alone.

In the first week the worker earns $240.00 of overtime pay and none of it qualifies. In the second, the state rule still pays 8 overtime hours, but only the 6 hours over 40 carry an FLSA premium, so $60.00 qualifies. If your employer pays overtime under a state rule, your pay stub may not split this out. For 2026 and later, the employer does the split and reports it on your W-2.

Public employees, hospitals and comp time

If your employer uses a different section 7 rule, such as 7(k) work periods for police and firefighters, 7(j) for hospitals, or 7(o) compensatory time for state and local government, the premium actually paid under that rule is what counts. Comp time counts in the year it is paid out as wages (used as a paid day off or cashed out), not when it is earned. Federal employees covered by OPM’s FLSA rules find their status in block 35 of the SF-50 (“N” means nonexempt).

The cap and the phase-out: $100 for each full $1,000

Schedule 1-A Part III applies the limits in a fixed order:

1. Add up qualified overtime (line 14c).
2. Take the smaller of that amount or the cap: $12,500, or $25,000 if married filing jointly (line 15). On a joint return the $25,000 is combined, not $12,500 per spouse.
3. Subtract $150,000 ($300,000 if married filing jointly) from your MAGI (lines 16–18). If the result is zero or less, the line 15 amount is your deduction.
4. Divide the excess by $1,000 and drop any fraction. Schedule 1-A’s own example: 1.5 becomes 1, and 0.05 becomes 0 (line 19).
5. Multiply by $100 (line 20) and subtract it from line 15. The result, never below zero, is the deduction (line 21).

MAGI here is your adjusted gross income (Form 1040 line 11b) plus any income excluded as foreign earned income or Puerto Rico or territory income. Because the deduction comes after AGI, it does not lower the MAGI used in its own phase-out.

Every row below comes from the engine.

Compare rows two to four. Between $160,000 and $160,999 of MAGI the reduction stays at $1,000.00; at $161,000 it becomes $1,100.00. Only full thousands count.

Who can claim it

• Married couples must file jointly. Married filing separately gets $0.
• Head of household and qualifying surviving spouse use the $12,500 cap and the $150,000 threshold, the same as single.
• A valid Social Security number is required: one valid for employment and issued before the return’s due date, including extensions. On a joint return, the spouse who earned the overtime needs one; if both did, both do.
• Tax years 2025 through 2028 only. Overtime paid in 2029 does not qualify unless Congress changes the law.

If you had more than one employer, add each employer’s qualified overtime first. The 2025 Form 1040 instructions include a worksheet for that, and the cap and phase-out then apply to the total on the return, not to each job.

The deduction follows the year the overtime is paid, using the same timing rules as wage withholding (FS-2026-13, Q3). A paycheck for late-December hours that is paid in January belongs to the new year.

2025 returns vs 2026–2028 returns

The paperwork changed between the first year and the rest.

For 2025, the Notice 2025-69 methods include: a premium your stub shows separately; one-third of a total that combines straight time and premium for hours paid at time-and-a-half; one-fourth of a total paid at double time; or your regular rate times your hours over 40, times one-half. The 2025 return guide walks through each one with numbers.

For 2026 on, the code TT figure is the total qualified overtime paid, with no cap applied. The IRS example has an employer reporting $30,000 even though the deduction stops at $12,500. Schedule 1-A applies the cap and the phase-out.

What the deduction does not change

• Social Security and Medicare. The IRS says overtime is still generally subject to both, and to income tax withholding.
• Withholding during the year. Your employer can’t reduce withholding for the deduction unless you give it a new Form W-4. The 2026 W-4 has a step 4(b) worksheet that accounts for it.
• State income tax. Section 225 amends only the federal Internal Revenue Code. Whether your state follows it depends on your state’s own tax law, and no IRS source we read addresses it. Your state’s tax agency or a tax professional can answer for your state.
• Your FLSA rights. The deduction changes nothing about who must be paid overtime or how much. That remains a question for your employer and, if pay looks wrong, your state labor department or the U.S. Department of Labor’s Wage and Hour Division.

Worked example: from time cards to Schedule 1-A

The inputs: tax year 2026, filing single, regular rate $20.00, 300 FLSA overtime hours across the year’s workweeks, MAGI $55,000, standard deduction, no other deductions.

1. Count FLSA overtime by workweek. Add each week’s hours in minutes, then take only the hours over 40 in each week. A week of 46:00 has 6:00 of FLSA overtime, whatever the state rule pays. The inputs above assume these weekly figures add to 300:00.
2. Find the regular rate for each week. Here it is $20.00 every week, with no bonus or differential.
3. Compute the premium. The engine gives ½ × $20.00 × 300 hours = $3,000.00.
4. Check it against your W-2. For 2026, box 12 code TT should show the employer’s figure. If it’s lower than your records and you believe it’s wrong, ask the employer for a W-2c; the return can use only the reported amount.
5. Apply the cap. $3,000.00 is under $12,500, so line 15 is $3,000.00.
6. Apply the phase-out. MAGI of $55,000 is below $150,000, so there is no reduction.
7. Read the deduction. Schedule 1-A line 21: $3,000.00.

What it’s worth: with the 2026 brackets and the assumptions above, the engine estimates about $360.00 less federal income tax, because this income sits in the 12% bracket. That estimate ignores credits and other deductions. Your actual return, prepared by you or a tax professional and processed by the IRS, decides the real figure.

Common misreadings

• Myth: Overtime is now tax-free. It isn’t. Only the premium is deductible, only from federal income tax, and only up to the cap.
• Myth: My whole overtime line counts. At time-and-a-half, only one-third of the overtime pay is premium. $15,000 of overtime pay at 1.5× gives $5,000 of qualified overtime.
• Myth: Double time doubles it. The qualified amount is the same as at time-and-a-half.
• Myth: The W-2 code TT amount is my deduction. It is the starting point. The cap and phase-out come after.
• Myth: Married filing separately still gets it. It gets $0; married couples must file jointly.
• Myth: Partial thousands count. They don’t. Single with MAGI of $160,999 is 10 full thousands over $150,000, a $1,000.00 reduction.

If the IRS questions a 2025 claim, it may send a CP321Q notice (overtime) or CP321P (tips and overtime) saying the deduction may be too high. The notice points you back to the Schedule 1-A instructions, and the IRS decides the outcome.

Next step

Run your own numbers in the no tax on overtime estimator. It takes the premium from your stub, your W-2 code TT amount, or your rate and FLSA overtime hours, applies the cap and the full-$1,000 phase-out, and shows what doesn’t count. For anything beyond the arithmetic, the IRS and a tax professional are the ones who decide.